The size, ownership and residents of elderly care homes have changed during the past 30 years. Around 430,000 elderly and disabled people live in long-term residential care in the UK, but only one in 10 are now in council or NHS-run institutions.
Voluntary and for-profit companies account for 57 per cent of the independent sector compared with only 5 per cent in 1989, according to the latest figures from market analysts Laing & Buisson. The newer, purpose-built homes are much bigger, and residential care is increasingly focused on people with complex conditions such as advanced dementia or Parkinson's.
Southern Cross was not the first company to fail – but it was by the far the biggest and highlighted how little financial scrutiny there is of companies paid huge amounts of public money to look after Britain's most vulnerable.
Buyouts, bond issues, refinancing and inter-company loans contribute to the complex and sometimes risky financial arrangements of some private investors and companies, making it difficult for councils to keep track.
This regulatory hole is not an issue, according to market analyst William Laing, who told The Independent that residents faced little risk as homes were more profitable open than shut. Every Southern Cross home was taken over by another operator.
Mr Laing said: "It is virtually impossible for local authorities to monitor the financial health of providers on presently available statutory information… The industry has lobbied, rightly in my view, against burdensome regulation, though it recognises that some sort of extra regulation is politically inevitable."
But Justin Bowden, a national officer at the GMB union, disagrees: "Despite what was promised after Southern Cross, transparency, overleveraging, tax havens, and debts all remain fundamental unresolved issues in this sector."
Sarah Pickup, president of the Association of Directors of Adult Social Services, said the last thing local authorities needed was for another major provider to fail. "Southern Cross showed us that the market had grown without the financial checks and balances which we need… but this is a sensitive area and it takes time to do."
The Independent and Corporate Watch examined Britain's 10 largest care home providers, as ranked by Laing & Buisson, of which eight are for-profit companies (seven private and one provident). None of these companies have the same business model as Southern Cross, but the corporate structures and debts of many leave them at the mercy of the market. The debts of Four Seasons, Care UK and NHP are rated as risky (junk bonds).
One of the private companies with a complex ownership structure is Bondcare, which owns 74 homes across England and Scotland.
According to the latest available accounts, Bondcare has loans worth £189m, which are largely secured against its property portfolio. But its assets are outweighed by its borrowings, and several Bondcare subsidiaries are late filing accounts at Companies House.
Southern Cross ran 39 of Bondcare's homes until its collapse. Their management was transferred to a subsidiary, Bondcare Nilerace, in October 2011. In June this year, its UK parent company, BC2 Ltd was put into "fixed charge receivership" – allowing its directors to be replaced.
The new directors include some known turnaround specialists and in October, Bondcare Nilerace changed its name to Akari Care. None of the companies in the Bondcare group is in any form of insolvency, according to receivers Ernst & Young.
A Bondcare spokesperson said: "Bondcare operates 35 care homes under four operating companies. Thirty-nine former Southern Cross nursing homes which were operated by Bondcare under a fixed contract have now been passed to another provider."
Bondcare has two intermediary parent companies based in Luxembourg and an ultimate parent company, Finsbury Trust Corporation Limited, registered in Gibraltar. One of the intermediaries has the option to buy all the company's UK freeholds for a fixed price until 2029. This gives it the potential opportunity to buy the group's investment properties for a below-market price and benefit from Luxembourg's lower taxes.
Justin Bowden said: "The Bondcare group seems to be in real financial difficulty. Some companies are choosing to be more transparent, but there has to be statutory regulation rather than surrendering the future of elderly people to the casino of the market."
Bondcare said: "Our remaining homes are operating by financially sound, private companies and our resources are focused on providing high quality care."
When private equity group Terra Firma bought Four Seasons, the UK's biggest care home provider, in July it reduced its debt from £780m to £525m – but it is paying between 9 per and 12 per cent interest a year. In August, Standard & Poor rated its bonds as "junk" and expressed concerns about the "relatively aggressive capital structure" after the buyout and its "highly leveraged" risk profile.
A Four Seasons spokesman said the financing structure was a traditional one which has been used successfully elsewhere in many sectors, often at similar levels of rating and leverage.
Many of the biggest providers continue to struggle with debts taken on before the credit crunch. Last year the NHP property company created HC-One, a new subsidiary, to manage its 236 ex-Southern Cross homes.
To avoid a repeat of the high rents that contributed to Southern Cross's demise, HC-One charges NHP 38 per cent less rent. But NHP is still labouring under debts of £1.8bn that have mounted since it breached the terms of its original £1.2bn bond in 2008. The loans remain "in standstill" as the company tries to renegotiate with lenders.
Due to this uncertainty, credit ratings agencies Moody's and Fitch have both rated the debt as "junk" or sub-investment grade. In August, Fitch said it might make further downgrades as it could be "challenging to materially improve the operating performance of HC-One in a short period of time", as only 21 per cent of its revenue comes from "more lucrative" private patients.
An NHP spokesman said it had worked hard to ensure its care homes business model was viable and remained vigilant to ensure it remained that way: "HC-One is not burdened with the debt of its shareholders."
With councils opting to provide care for the elderly at home as long as possible, the better performing companies tend to have more self-paying residents.
Barchester Healthcare reported a £16m profit in 2011, but is still wrestling with a £1bn debt due to mature in October 2013 – made worse by another £487m the company owes after a series of deals with RBS backfired.
The Barchester group owns the freeholds on 180 of its 192 homes, but a complicated corporate structure was introduced in 2006 that split the operations and ownership of the homes. Its 30-year leases with rents linked to the retail price index and increases capped should protect the homes from any problems encountered by the owners.
However, the leases are required to include a 12-week break clause that could be activated by receivers in the event that Barchester was unable to pay its debt – which would allow the investors to take control of the care homes.
A Barchester spokesman said it had "no intention" of defaulting on its debt and was "in discussions with lenders to amend and extend [credit] facilities".
The debts of MHA and Anchor Trust, the two charities in the top 10, are easily covered by their assets. BUPA, a provident association with no shareholders or dividends, has net assets of £4.5bn.
The health and social care regulator, the Care Quality Commission, is responsible for monitoring the quality of care homes, public and private. Many feel Southern Cross demonstrated the need for similar financial intelligence to help predict any potential future crises.